This long but worth the read, the March market summary lends itself perfectly to the topic of “how to properly shop for mortgage financing.”
March was a little nutty to say the least. Bonds roared in like a lion going from 101.94 for the FNMA 4.5% bond up to 102.81 on 3/16/2011. Of course in sticking with the cliché, they went out like a lamb a saw that go from the 102.81 down to touch a low price point of 101.34 and then close the month at 101.69. So there was a 1.47 swing between the high and the low, or 147bps. To put that in context to rates, that means that for every $100,000 borrowed on a home loan, the cost of borrowing that same amount of money would have been $1,470 more expensive to borrow on the day that prices hit the low 101.34 than it was on the day prices hit the high of 102.81. That cost may have translated to a higher rate or to higher up front cost or some balanced combination of the two. Either way, I’m sure you can understand that in only a 31 day window, $1,470 swing in cost for the same amount of money borrowed by the same person is a pretty big swing!
That would be like the cost of gas going from $2.50/gal on day 1, dropping to $1/gal half way through the month, hitting a new high of $5/gal before settling back around $3/gal at the end of the month. Now gas prices have certainly been volatile as of late but they don’t hold a candle to the mortgage rate environment. Especially when you look at a day like March 21 where to translate to the gas analogy it would be like seeing gas for $1.80/gal on your way to work, $2.50/gal on your way to lunch, $3.25/gal on your way back from lunch, and then $4.00/gal on your way home. That is literally what mortgage rates did on that one day.
That’s a prime example of how foolish it is when you are mortgage shopping to get a rate quote from someone, then call someone else the next day to get a quote, then a 3rd one the following day….what are you comparing? NOTHING! The number way to properly choose your mortgage lender are by asking these questions and making sure the lender answers all correctly. The questions are below, the answers are in red.
1) What dictates mortgage rates? The price of mortgage backed securities. Not the 10 yr Tbill, not Fed Funds Rate, not the Discount rate, not Prime, not anything else. MBS and that's it.
2) Do you have a system in place to monitor the market because I understand it’s been very volatile lately? Obviously you want them to say "yes." Ask them what that system is and how accurately have they predicted recent movements in the bond market.
3) What is the next piece of economic news that may influence mortgage rates? This obviously will vary but if they stammer, they're making it up so just use your intuition here and then check them against this blog. (Economic calendar for the month will be posted the first week of each month.)
4) What are your set costs? Common sense, this is the one place where lenders will vary and that cost in most circumstances is fixed regardless of what the rest of the market is doing.
5) What adjustments are going to come to my interest rates based on my credit, the property, the amount I’m borrowing, etc.? Check this blog for information on "Loan Level Pricing Adjustments" and you can guage the accuracy of their answer.
6) What options can you give me for various ways to structure my home loan that will help me achieve the goals and objectives that I have set to ensure my family’s financial well-being? This is the most personal of the questions so make sure you like what the answer is.
Your only real option if you are 100% rate shopping is to get those 3 lenders to agree to a conference call and have them simultaneously quote rates for your very specific and unique profile. (They will all need specifics on the property, your credit report (not you giving them the score, they will need their own report!), the time frame you wish to close, the intended use of the property, if it’s a refinance they will need to know the nature of the transaction (is it rate and term or are you taking cash out?) and the list goes on and on. So it’s very difficult to actually quote a rate without any information and it’s very difficult to compare a rate if you have been given a quote from someone and there is no background information at what was used for that quote.
I am constantly amazed by people that will give their mortgage business over to the lowest bidder when they are driving a $70,000 car, wearing $500 shoes, and do all their shopping at high end stores….they obviously pay for quality, or perceived quality, in all other facets of their life but yet when it comes to their $417,000 mortgage loan on their $600,000 house they are going to farm it out to the lowest bidder. I’m not suggesting you pay no attention to rate and fees, I’m simply suggesting that some value has to be given to guarantee of funding, gold standard service, expertise of the markets to properly position and structure debt favorably, etc. For a test case, pick the mortgage you want and remember your answer:
3.5% without a 1% origination fee.
4.25% without a 1% origination fee.
4.75% with a 1% origination fee.
Have your answer?
Well if you went with 3.5% and no upfront cost, that’s fantastic. It’s a 5/1 ARM and it might be your best fit but it may not because of the uncertainty of that rate after the 5 years is over. Do you have a plan in place? Have you discussed this plan with your mortgage professional and feel good about your ability to execute it and keep this plan in place so that the ARM works best for you? Maybe, but if you went with just the lowest bidder, you may be in trouble.
How about 4.25% without the upfront? Might be the way to go but it’s a 15 year fixed so it’s going to have a substantially higher monthly payment. Does it fit in your budget? Does it work with your other investment strategies? How does your financial planner feel about the reduced monthly cash flow that might be taking away from your IRA contributions? Hope you didn’t go with the lowest bidder.
If you went with 4.75% and 1% up front, that might be good because it’s a 30 year fixed. But what if you’re in medical school and you know that in 3 years you’re moving to do your residency? On just a $150,000 loan amount, you’re going to be paying $108.90/mo more, times 60 months = $6,534 total + $1,500 = $8,034 total that you would have paid that you otherwise wouldn’t have had you been talking to a true professional.
The point is, every person reading this may have come to a different conclusion as to which would make sense for their situation. This is why it is of the utmost importance to be dealing with a true professional rather than the lowest bidder.
Add into that the fact that on our worst day in March, you may have been quoted on a 30 year fixed at 5.125% and on March 16th, you may have been quoted 5%. If you went with the lowest bidder, you actually got the short end of the stick. How’s that? Easy, I would’ve quoted 5.125% on March 9th and that 5%, assuming that quote came only 6 days later, was actually a full .25% HIGHER than my rate on that same day. I was locking 4.75% on the afternoon of 3/16. Not that low before then and hasn’t been back there since then. So by going with your perceived “lowest bidder” on a $250,000 loan, you lost out on $37.93/mo savings which comes out to $4,551.16 over 10 years and $13,654.80 over the life of the loan and that is ONLY assuming they both close and close on time!!
Often the “lowest bidder” can’t deliver the rate but can’t deliver the actual closing period and that means earnest money lost, additional expenses for rentals on storage/trucks/existing apartment/etc., not to mention the sheer disappointment that comes with being sold a bill of goods and then finding out too late that whole thing not only fell apart, but never really existed everything was based on the lowest bidder setting expectations that were never going to be met. Of course the chances of you getting in touch with them to ask why is right around the slim to none range..... The moral of the story is very simple, you get what you pay for!
